When folks consider the low-interest rate of their mortgage, they tend to feel the need to refinance their mortgage. However, such decisions should not be made emotionally. Also, it isn’t a decision that should be made as a result of your current financial circumstances.

As you ponder getting the best out of your home lån (loan) via refinancing, there are other factors you need to put into considerations apart from the interest rates and your financial situation.

Therefore, in this article, we will look at some important things you should know before you begin the process of refinancing a mortgage.


1. The Equity of your Home

This is the first thing you need to know before you begin the entire process. You should know the current equity of your house. In the event whereby the current value of your home is lesser than its value when you got the mortgage, then the house has negative equity. In such a case, it isn’t wise to carry on with the refinancing.

Interestingly, if you live in the U.S., reports have shown that property equities have increased in recent times. If you are looking for a figure to ascertain the level of increase, the report says that an increase of 29.3% is what most homeowners are enjoying.

Hence, for most folks in America, negative equity might not be an issue. Nevertheless, some homes did not experience this equity rise as others did. Some properties still have negative equity.

For such a mortgage, the refinance process is usually impossible especially if you are dealing with traditional lenders. You could still qualify if you apply for certain government programs but they are usually rare and well-contested for.

Therefore, if you are thinking about refinancing, we will advise that you find out what the current equity situation of your property is. Your equity should be a minimum of 20% to enable you to get the loan you desire.

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2. Credit Score

Given the global economic situation, the qualification standards set by most lenders have increased recently. Hence, it isn’t surprising to see these days that someone with a good credit score might not be granted certain loans especially those whose interest rates are low.

These days, if you want to secure the best mortgage, your credit score should be 760 at least. Such a score will better your chances of getting low-interest rate loans. Folks with credit scores that are less than 760 might get a loan but will have to settle for those with high-interest rates. Visit https://www.nerdwallet.com/article/finance/raise-credit-score-fast to learn how to improve your credit score.

3. Debt-to-Income (DTI) Ratio

After you have known what your home equity and credit score is, you need to find out what the ratio of your debt to income is. Many people ignore this not knowing how significant it is to ensure they get the loan.

People who tend to ignore this issue are those who might have gotten a mortgage in the past. Hence, they assume that since they were able to get one before, they should be able to get one now. However, this is not always the case.

The standards for DTI ratio have been increased as well by lenders. In other words, the DTI ratio that qualified you for your previous mortgage might not qualify you for a new one.

Certain factors give you the upper hand to secure a loan. These factors include significant savings, high income, and stable and long job history in most cases. However, these days, lenders will still look into your housing payments per month. It is expected that such payments should not exceed 28 percent of your income per month.

As a whole, the ratio for your DTI should not exceed 36%. Some lenders place 43% as the benchmark; whichever way, the lower the DTI ratio, the better your chances of qualifying.

If your debt-to-income ratio is more than 36% or 43% as the case may be, we recommend you settle some debts. You should do this before you begin the refinancing process to avoid being rejected.

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4. Refinancing Costs

Did you know that there is a cost for refinancing? If you didn’t, then it is good that you are reading this write-up. When you refinance your home, the cost of the process is usually around 3 percent to 6 percent of the overall loan amount.

While this might look scary to some folks, there are different ways you can cut down this cost or make them part of the loan. One of the things you need to do is to have a large amount of equity. If you possess such, you can easily roll the refinance costs into a new loan which will cost the principal to increase.

Some lenders do not attach any cost to this process; they refer to it as “no-cost”. While this might look so good, the truth is that you get to pay more interest to foot the closing.

Hence, when you want to begin this process, we advise that you contact different lenders to find out which one is best for you. Also, you should negotiate to secure a good deal.

5. Refinancing Points

One of the reasons apart from the above why you need to contact different lenders is to allow you to compare interest points. Points are usually the 1% equivalent of the overall loan amount and are paid to reduce the loan’s interest rate.

Therefore, you should find out how much will be paid in points for each loan. This is important as you will have to make this payment when closing the loan.

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6. Rates versus the Duration

You shouldn’t just focus your attention on the loan’s interest rates alone as most borrowers do. Your needs and goals must be determined to help you select the best product.

For instance, if you have a goal to reduce payments in a month to the barest minimum possible, then you will need a mortgage with interest rates that are the lowest. Not only that, the duration for repayment (term) must be the longest available.

If you are looking for a loan that has lower interest for that duration, go for the one with the least interest rate within the shortest duration.

If you plan to quickly pay off your mortgage, get one with the least term whereby the repayments are affordable.

7. Private Mortgage Insurance (PMI)

If your home equity is lower than 20% when you decide to refinance, you will have to pay PMI. You might not have an issue with this if you pay PMI already under a loan you are currently servicing. However, for homeowners whose property value has decreased, this payment is necessary.

8. Breakeven Point

This is a fundamental calculation that will allow you to decide if you can refinance or not. This calculation refers to the point whereby your savings in a month has covered the refinancing costs. Hence, beyond that point, the savings that remain is yours.

For instance, if the cost of refinancing is $3,000 and your savings per month is just $100 over your former loan. What that means is that to recover the costs, you need 30 months. If you have plans to sell your property or move within this period, refinancing might not be the best step to take. Click here to learn more about the breakeven point and how to calculate it.

9. Taxes

The final thing you should pay attention to is your taxes. When you refinance your home and end up making a lesser interest payment, it could lead to a lower tax deduction.

You should speak with your tax advisor to advise you on how the refinancing process could impact your taxes.

Conclusion

Refinancing your mortgage is a major decision you shouldn’t make without careful considerations. Therefore, in the article above, we have discussed some major factors you need to consider before you refinance your home.

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